Another Industrial REIT Delivers Good Results

 

chart01

  1. Industrial REITs has continuously delivered good results and it doesn’t appear that this is going to change in 2016.
  2. Like Prologis, EastGroup Properties reported a double digit rent releasing spread in Q1.
  3. EastGroup has been distributing the same or increased dividends for the last 24 years in a row, which is definitely a good record among industrial REITs.
  4. Despite its Texas concentration, conservatism has been a mark in the management.
  5. Multiples indicate the stock has been at least correctly priced or overpriced.

As we pointed out in last week’s Prologis article, industrial real estate has been delivering good results and it doesn’t appear that 2016 will be any different (click here). In this context, EastGroup Properties has positioned itself for moderate growth and a good track record. By the way, it is one of two industrial REITs that has been distributing same or increased dividends for 24 years. EastGroup’s dividend has accumulated a CAGR in the range of 3-4%.

Like Prologis, rental change for new leases and renewals has been strong in Q1. EastGroup reported a 16.5% GAAP releasing spread, which is their record. That translated into a mild same store property net operating income growth of 2.2%.

In fact, EastGroup is an entirely different kind of animal when compared to Prologis. It is a midsized market cap REIT (approximately $2 billion), focused on a couple of states in the southern part of the US. Their properties are multi-tenant business distribution buildings close to major transportation routes that cater to tenants who are in need of industrial properties in the 5-50k square feet range.

chart02Naturally, its Texas concentration, specifically in the Houston area (19% of portfolio), has been a concern due to the instability in the oil industry. Given that its occupancy has held steady, we cannot affirm they’ve been strongly impacted, but it has certainly called management’s attention to a broader diversification in their portfolio. EastGroup’s top ten tenants account for less than 10% of the portfolio. Being exposed to a single tenant isn’t a concern here.

This Jackson, MS based REIT has a tradition in development. 39% of its portfolio has been developed by the company, which has proudly been around since 1969 and whose most recent configuration dates backs to the 1980s. Home grown talent seems to be the rule here, as its newest CEO first joined the company as an intern. In addition, some of the senior executives have been with the company for a long time.

chart03Conservatism is definitely one of the company’s features that is also reflected in its dividend policies. Over the past 15 years, the company has maintained a dividend payout ratio in the 60s and 70s. Recently, the ratio has been around 66%.

Its debt profile could be better, since its debt to adjusted EBITDA has been above 6.0. Nonetheless, the company has a BBB credit rating from Fitch and Baa2 from Moody’s and its debt to total market capitalization around a third.

Like a large part of the REIT industrials, the fundamentals have been dependent on GDP performance so it comes as no surprise that the stock is correlated to S&P500. EastGroup has accompanied the market in its ups and downs. Most importantly, the stock has rebounded over and over. In addition, its AFFO multiple has been flying high at around 22x. In turn, its FFO multiple has been around 16x, still higher than historic norm. The stock is definitely not cheap.

For that reason, the company may revise its decision not to issue equity. The company minimized equity issuance in 2015 and their current position is that they don’t expect new issuances this year. They are planning to sell the least strategic properties (including some in Houston) and reinvest in the development.

Source: Prologis, Inc.(NYSE:PLD), EastGroup Properties Inc.(NYSE:EGP), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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